How to Deduct Business Use of Your Vehicle for Self-Employed Indiduals in Canada

If you are self-employed or own a small business in Canada, it is likely that you use a vehicle for your business activities. Did you know that you can claim vehicle-related expenses as a legitimate tax deduction? Here is a comprehensive guide on how to manage and claim vehicle expenses in Canada.

Commercial Use of a Motor Vehicle:

You can claim expenses incurred when using a motor vehicle for business purposes.

To calculate the deductible amount, complete "Chart A - Motor Vehicle Expenses" on Form T2125, Statement of Business or Professional Activities.

If you are a partner in a business partnership and use your personal vehicle for business purposes, you can claim those expenses on Line 9943 by completing Part 5 of Form T2125.

Keep a record of both total kilometers driven and kilometers specifically driven to earn income.

Calculation of Motor Vehicle Expenses:

If you use a vehicle for both business and personal purposes, deduct only the portion of expenses related to business income.

You can fully deduct parking fees related to business activities and additional commercial insurance.

Commercial use in farming activities includes trips for supplies and equipment.

Commercial use in fishing activities includes trips for supplies and fish deliveries.

CRA Recommended Methods

To claim vehicle expenses in Canada, especially for business purposes, you must maintain a meticulous mileage log. Here are the key steps and methods:

Full Logbook Method:

Best Evidence: Keep an accurate log of business trips throughout the year.

For each business trip, record:

• Date
• Destination
• Purpose
• Number of kilometers driven

Record the odometer reading of your vehicle at the beginning and end of the fiscal period.

If you change vehicles during the year, record the dates and odometer readings for the purchase, sale, or exchange of the vehicle.

Use this detailed logbook to calculate your deductible motor vehicle expenses.

Simplified Logbook Method:

Establish the business use of a base year by keeping a full logbook for an entire year.

After the base year, use a sample logbook for three months to estimate the business use for the entire year (within 10% of the base year's results).

Calculate business use by multiplying the base year's business use by the proportion of the sample period to the base year period.

Ensure the base year's use remains representative of normal use.

Receipts and Invoices:

Keep all receipts and invoices (electronically or physically) for car-related expenses incurred during the year.

Types of expenses you can claim include:

• License and registration fees
• Fuel and oil costs
• Repairs and maintenance
• Insurance
• Interest on car loans
• Parking fees related to business activities
• Supplemental commercial insurance

Mileage Tracking Apps:

Use mileage tracking apps to simplify the process:

• Quickbooks Self-Employed: In addition to helping with your bookkeeping, it has a function to track personal and business use of your trips.
• MileIQ: Automatically tracks business trips and allows easy classification as business or personal.

Other options include TripLog, Hurdlr, Everlance, and MileageWise.

These apps help you log your trips, classify them, and generate accurate reports for tax purposes.

Example Calculation:

Let's say Andrea owns a truck used for business purposes.

She drove 27,000 kilometers to earn business income out of a total of 30,000 kilometers.

Her truck expenses include gas, oil, repairs, maintenance, insurance, and loan interest for purchasing the truck, totaling $7,000.

Andrea's deductible amount for the fiscal year is:

(27,000 km / 30,000 km x $7,000 = $6,300)

If Andrea has business or professional income, she can claim this amount on Line 9281 of Form T2125.

Remember to keep detailed records and receipts to support your claims. 🚗💼

Ready to Claim Your Vehicle Expenses?

If you are ready to claim your business vehicle expenses and maximize your tax savings, we are here to help! At Toro Financial, we offer free consultations for entrepreneurs and self-employed individuals in Canada. Schedule your free call today and let us help you optimize your business finances!

Remember, properly claiming your vehicle expenses can make a big difference in your taxes, so make sure not to leave money on the table. We look forward to helping you on your journey to business success!